CASRIP Newsletter - Fall 1998, Volume 5, Issue 3

Big Change in Measurement for Japanese Patent Infringement Damages? Tokyo District Court Awards $23.5 Million in Lost Profits Damages

Japanese courts have been extensively criticized by U.S. patent owners for awarding only small damages. This is because Japanese courts seldom award damages in the form of lost profits but only award a reasonable royalty. The primary reason for not awarding lost profits is the difficulty of establishing causation between the infringement act and damages. Unlike the Federal Circuit, Japanese courts do not have established case law that allows the court to examine four factors to infer causation, and thus patentees often fail to establish the causation to claim damages in the form of lost profits.2 Case law indicates that Japanese courts are eager to accept defendants' arguments to negate causation between infringement and lost profits. Such arguments include the presence of non-infringing substitute in the market, the sales of infringing products resulting from the infringer's market power or strategies, and other factors than the feature related to the patent.

In order to establish what a reasonable royalty is, courts frequently make reference to published royalty rates to license government owned patents.3 Since the government license rates are set low to encourage technology transfer, damages in the form of reasonable royalties awarded by Japanese courts are often even lower than those of the industry standard.4 Thus, Japanese scholars and patent professionals have criticized this practice as encouraging infringement.5

Responding to these criticisms, the Japanese Patent Office began to evaluate the current patent infringement damages system and published several reports.6 Last year, they tried to introduce a bill to change provisions for the measurement of damages and introduce provisions to reduce a patentee's burden of proof in showing causation between infringement and lost profits. However, because the Justice Department did not approve the proposed damage provisions that would conflict with damage provisions of other laws, the JPO introduced a bill only to increase criminal sanctions but plans to introduce a bill to revise provisions relating to civil remedies this year.7

Traditionally, Japanese courts are very reluctant to award huge damages which would make a party bankrupt. This is no longer true. The Smithkline case clearly indicates a new trend following the direction announced by the JPO to increase the value of Japanese patents by increasing patent infringement damages because the court awarded damages huge enough to send the defendant into bankruptcy.

In Smithkline, the patentee, Smithkline & Beecham French Laboratory (SKF) and its subsidiary, Smithkline Beecham Seiyaku K.K.(SBS) jointly sued a Japanese generic drug manufacturer, Fujimoto Seiyaku K.K. SKF owned a Japanese patent (Japanese Patent No. 1062766) for a process for producing a chiano-guinidine compound called "cimetidine," a pharmaceutical product which effectively treats ulcerative diseases. SBS is the exclusive licensee of the '766 patent for selling the compound in Japan under the trademark of "Tagamet." The only claim of the '677 patent identified a compound as starting material which would react with amine described by R1NH2 to produce a compound described by the formula:

Fujimoto did not produce the accused product. Instead, it imported the product from Yugoslavia (Slovenia) and sold it in Japan. Because the patent at issue relates to a process, it was difficult to establish how the products were made outside Japan. Because Japanese Civil Procedure does not provide measures to collect evidence as extensive as discovery available under U.S. law, Patent Law Article 104 remedies the difficulty and provides conditions to shift the patentee's burden of proof to the defendant. In short, if the product was not publicly known as of the filing date, it is presumed to have been produced by the patented product. Thus, the provisions allowed the plaintiffs to show that Fujimoto's product was produced by its patented process by showing that cimetidine was not publicly known on the priority date of the Japanese patent application.

Fujimoto argued that SKF's '766 patent is not entitled to the benefit of the priority date and cimetidine was publicly known as of its actual Japanese filing date. In arguing for rejecting the priority benefit, Fujimoto contended that SFK's filed another U.K. application earlier than the U.K. application on which the priority of the '677 patent is based and the earlier application also disclosed the patented cimetidine. Although the earlier application disclosed a genus compound of cimetidine, Fujimoto believed that one skilled in the art would have readily produced cimetidine from the disclosure in the earlier application. This is supported by the fact that the Japanese application based its priority on the earlier U.K. patent which was amended to introduce the structure of cimetidine, but the amendment was not viewed as introducing a new matter and did not jeopardize the priority. Because the application on which the priority of the '677 patent is based is not the first application in Paris member states, Fujimoto argued that the '677 patent fails to meet the requirements for enjoying the priority and thus the application date under Article 104 should be the actual Japanese filing date. Fujimoto further argued that its product was produced by a process different from the '677 patent process and introduced production records of its product.

With respect to damages, the plaintiffs requested total 5,000 M Yen ($38.5M), including (1) lost profits based on sales of infringing products by Fujimoto; and (2) unjust enrichment for failing to pay 5% license royalty fees. First, Fujimoto claims that SBS is not the exclusive licensee of the '677 patent because several other Japanese companies sell cimetidine. It also argued that there is no causation between sales of infringing products and SBS's reduced sales, stating that the significant reduction of SBS's sales resulted from withdrawal of SBS's Japanese distributor from Tagemet's sales. Fujimoto further disputed the amount of infringing products and the profits of SKS's product. Additionally, it requested application of the 3-year statute of limitations to earlier sales of infringing products. With respect to claims based on unjust enrichment, Fujimoto viewed 5% as too high and requested a 2% royalty, that is the lowest rate of 2-4% range of the published rate for licensing government-owned patents.

Tokyo District Court agreed with the plaintiff, finding infringement by Fujimoto's product and accepting evidence produced by the plaintiff to calculate damages. In denying Fujimoto's argument with respect to losing priority, the court agreed with the plaintiff that the disclosure of the structure of a genus chemical compound would not enable one skilled in the art to understand a process of producing a species compound of the genus compound unless the species compound and its property are identified as well as a process of producing the compound are disclosed by discussing an embodiment of the process. Since the earlier U.K. patent merely disclosed the structure of a generic compound of cimetidine, it did not disclose cimetidine itself. The court rejected Fujimoto's argument based on introduction of cimetidine not viewed as a new matter, stating that the proceeding of an application after pending in the Japanese Patent Office does not affect whether the application is entitled to the benefit of priority. Since SKF obtained a separate patent on cimetidine filed on the same day as the '677 patent, cimetidine was not publicly known on the priority date.

Tokyo District Court also rejected Fujimoto's argument that its product was made by a different process. Fujimoto argued from evidence produced by the plaintiff, which compared impurities included in the patented and accused products. In contrast, the court discounted the credibility of Fujimoto's evidence and concluded that Fujimoto's product was produced by the '677 patent process.

Upholding Fujimoto's liability, the court accepted most of the plaintiff's arguments for determining damages. The court agreed with the plaintiffs that SKS is the exclusive licensee of the '677 patent because Japanese companies other than SKS who currently sell cimedine were former infringers and forced to settle and get a license from SKF. Such former infringers should not viewed as legal licensees because it is unreasonable to prevent an exclusive licensee from getting compensation from other infringers once he or she settles a case with some infringers in the market. The court did not want to treat former illegal infringers the same as legal licensees because otherwise, illegal infringers would benefit from the acts of lawful exclusive licensees.

With respect to the amount of infringing product sold by Fujimoto, the court accepted most of the plaintiff's arguments because Fujimoto refused to produce accounting books necessary to calculate the sales of the infringing product. The court also accepted the plaintiff's evidence showing the net profits made by its own product and multiplying the profits by the amount of Fujimoto's sales to calculate lost profits. The plaintiffs also claimed damages incurred after the expiration date of the '677 patent. Their argument is based on the accelerated reentry theory. According to the theory, Fujimoto could not have entered the market at least one year after the expiration date because it would have needed at least one year to obtain approval from the government to sell its generic version of the patented drug. However, the court rejected the plaintiff's claim, stating that the act of filing for an approval itself does not give rise to infringement.

The court also agreed with the plaintiff that causation exists between Fujimoto's infringement and SKS's lost sales. It rejected Fujimoto's argument because, although products treating similar diseases were available on the market, the infringing product was exactly the same as the product resulting from the patented process and the efficacy and properties of other products are different from those of the product made by the patented process. Finally, the court adopted a 3.5% royalty but did not give any reason why it adopted the rate. As a result, Tokyo District Court awarded the total 3059.36 M yen (lost profits: 2559.36 M yen; unjust enrichment: 500.M yen; plus 5% statutory interests) with statutory 5% interest to the plaintiff.

This case presents interesting issues. First, with respect to the benefit of priority, the Federal Circuit dealt with a similar issue with respect to the written description requirements under Section 112, Paragraph 1, in Tronzo v. Biomet Inc.8 In Tronzo, the Federal Circuit denied the benefit of the parent application filing date for generic claims which are included in its continuation-in-part (CIP) application because it found that the parent application did not disclose the subject matter which was covered by the generic claims. Because intervening prior art, the patentee's own U.K. patent, existed between the filing dates of the parent and CIP applications, the claims were found to be invalid. Judge Newman, in her concurring opinion, expressed a view similar to that adopted by the Tokyo District Court in Smithkline, stating that the issue of relating back to a parent filing date must be considered separately from the issue of the written description requirement relating to the constructive reduction of a generic claim. In spite of some merit in Judge Newman's points, the majority's rule represents the proper law in this country: that both under §§ 119 and 120 any claim not supported under § 112 by the parent enjoys only the filing date of the CIP with respect to § 102 (b), even though the disclosures of the intervening prior art and the parent case are identical.9 Had the case been decided by the Federal Circuit, the rule applied by the Tronzo majority would have prevented Smithkline from claiming priority because of the addition of cimeditine, which the Tokyo District Court found as new matter.

With respect to the calculation of damages, the court flatly refused the defendant's argument to negate the causation. Although courts tend to uphold causation when the infringing products and the patentee's products are the same or substantially the same, courts were often eager to accept arguments from the defendant and denied the causation by stating that the patentee did not establish that it would have sold the products sold by the infringer but for the infringement.10

Here the Tokyo District Court went beyond the Federal Circuit by ignoring the presence of competing products such as Zantac that superseded cimeditine in the U.S. Market. Further, under U.S. law, after a grant of a license, regardless of whether the license is given to former infringers or legal licensees, an infringer could never be shown to have taken sales away from the patentee. Thus, the plaintiff of this case could not have established causation even under the patent-friendly Federal Circuit case law.

The court applied the effect resulting from the refusal of the request for the production of documentary evidence which was introduced by the revision of Civil Procedure that became effective January 1, 1998.11 In the past, it was extremely difficult for patentees to obtain documents to show the number of products sold by the infringer because Japanese Civil Procedure limited the applicability of the provision for the production of documents and provided very weak sanctions against a refusal of the request.12 Although Patent Law 105 separately provides for the production of documents, it did not function well because of its ineffective sanctions.13 The Smithkline case clearly indicated that the new civil procedure made it much easier for patentees to show the amount of damages. Finally, the court seems to follow the well-established practice of adopting the published rate.

Overall, Smithkline clearly indicates that courts can handle appropriate patent infringement damages issues without extensive revisions of patent statutes proposed by the JPO. Because courts traditionally take the initiative to develop a policy on issues relating to damages, including IP infringement damages, it is doubtful the JPO still needs to introduce extensive revisions that may conflict with damage provisions in other laws.

Toshiko Takenaka

1. Judgment of Tokyo Dist. Ct., October 12, 1998 (unreported).2. For a general discussions of Japanese patent infringement damages, see Noboru Toyama, Study With Respect to Proper Civil Remedies for Infringements of Intellectual Property, 5 IIP Bulletin 62 (1996). 3.Id.4. Institute of Intellectual Property, Chiteki Zaisanken ni kakaru Minjiteki Kyusai no Tekiseika ni kansuru Chousa Houkoku (Reports on Study of Appropriate Civil Remedies for Intellectual Property Infringement Remedies, hereinunder IP Remedies), 39 (1996). 5. Tamura, Chiteki Zaisanken to Songai Baishou (Intellectual Property and Infringement Damages) 41 seq. (1993).6. Takenaka, The JPO's Revised Review of the Appropriateness of Intellectual Property Damages,4 CASRIP Newsletter 8 (CASRIP, Univ. of Wash School of Law, Washington) Spring/Summer 1997.7. Tokkyoho To no Ichibu wo Kaiseisuru Houritsu (Law to Revise Part of Patent Law etc.)8. 156 F.3d 1154, 47 USPQ2d 1829 (Fed. Cir. 1998)9. In re Ruscetta, 255 F.2d 687, 118 U.S.P.Q. 101 (C.C.P.A. 1958). See also Paperless Accounting, Inc. v. Bay Area Rapid Transit Systems, 804 F.2d 659, 231 U.S.P.Q. 649 (Fed. Cir. 1986). For a general discussion, see Adelman, 1 Patent Law Perspectives, 2d Ed. at § 2.3 [5.-4] at n.77.10. IP Remedies on note 4 at 34.11. Civil Procedure Law, Article 224. The new law enables courts to treat a refusal as an admission of the argument advanced by the party who requested the production of the document. 12. For a general discussion of the new civil procedure, see Takabayashi, 4 CASRIP Newsletter 13 (CASRIP, Univ. of Wash School of Law, Washington)Spring/Summer 1998.13. Patent Law 105 reads:In litigation relating to the infringement of a patent right or exclusive license, the court may, upon the request of a party, order the other party to produce document necessary for the assessment of the damage caused by the infringement. However, this provision shall not apply when the person possessing the document has a legitimate reason for refusing to produce them.